The first impact of a dispute on a particular asset

Gabriella Legrenzi, Lecturer of Economics, Keele UniversityReinhold Heinlein, Lecturer of Economics, University of the West of EnglandAnd Scott Mahadeo, Senior Lecturer of Macroeconomics, University of Portsmouth..

It’s been two weeks as the world woke up to the horrifying news of the Russian attack on Ukraine. Despite the immense costs of human life, human capital and physical infrastructure, we have witnessed a great deal of turmoil in financial markets.

Because markets tend to react to geopolitical risks Federal Reserve, Dario Caldara When Matteo Iacoviello, Created a Geopolitical Risk Index (GPR) based on real-time news information on war threats, terrorist threats, military buildups, and nuclear threats …

Source: Twitter / @ MVS_UA

Below you can see their daily data graph, which dates back about 40 years. The most notable surges were the 1991 Gulf War, September 11, the start of the Iraq War in March 2003, the bombing of London in July 2005, and the current invasion of Ukraine. The index estimates that it is still far from the level of geopolitical risk experienced in the aftermath of September 11.

Source: Caldara / Iacobiello

High geopolitical risks have been shown to increase investor uncertainty and lower the prices of stocks and other financial assets. The link to stock market uncertainty is particularly evident in the chart below, which compares GPR to the VIX index of stock market volatility, the Investor Fear Gauge.

The daily GPR is orange, but there are two other versions that track threat risk (red) and geopolitics (green). Basically, they all moved in the same direction. Both these lines and VIX rose in November after satellite imagery first showed the buildup of Russian troops at the border with Ukraine. Other peaks correspond to January 26, the date of NATO’s written response to Russians, and the start of the invasion on February 24.

Geopolitical risk and stock market volatility

Measures of Underground Risk Index and Volatility Index VIXGPRD (orange) = Daily GPR; GPRD_Act (green) = Geopolitical Action; GPRD_Threat (Red) = Geopolitical Threat.Provided by the author

Increase in raw materials

Given Russia’s importance as an oil exporter, energy prices are particularly affected by this war. Brent’s barrel is currently trading at around $ 116 after surpassing $ 130 a few days ago. This affects everything from business cash flow to consumer gasoline prices, creating inflationary pressures that help drive a recession.

Russia and Ukraine are also major exporters of many other important commodities such as wheat, neon gas, palladium and sunflower oil, prices are skyrocketing and could continue to rise due to western sanctions.

Comparison of product prices since the invasion

Brent = Blue; Wheat = Cyan; Palladium = Indigo; Gold = Orange; Bitcoin = Yellow; US Dollar (DXY) = Purple; 10-Year US Treasury Bond = Green. TradingView

Meanwhile, safe shelters in the era of volatility are on track. Gold prices have risen again after showing a remarkable rise in the first few months of the pandemic. Bitcoin and other cryptocurrencies have the potential to benefit as Russians may be a means to circumvent sanctions, but their rise has been more curtailed these days.

Stock market

The reaction of the stock market to war is more complex. This is because different markets are more or less exposed to different degrees for a particular product compared to other products. They also have different levels of exposure to the Russian stock market (which remain closed after a plunge in the ruble after the invasion).

Calculations based on data dating back to 1985 show that European countries are highly correlated with the Russian market and therefore highly vulnerable. For example, France, Germany and the United Kingdom have 0.45, 0.42 and 0.47 correlations with Russia. Here, 1 means that they are moving at the same pace, and 0 means that they have no effect. On the other hand, the US correlation is 0.26, but interestingly, the Chinese correlation is only 0.1. This all corresponds broadly to the performance of various stock markets since the invasion.

Stock market comparison

FTSE 100 (UK) = Blue; S & P 500 (US) = Orange; Toronto Stock Exchange (Canada) = Cyan; CAC 40 (France) = Yellow; DE40 (Germany) = Indigo; Shanghai Stock Exchange = Green; MOEX ( Russia) = purple. TradingView

Finally, what about different types of companies? At the beginning of this crisis, very different performances were recorded for each sector. The black line represents the S & P 500. Therefore, the following companies have low performance, and the above companies have good performance.

For example, companies in the energy sector are doing very well (as well as weapons makers). From HiFi devices to movie tickets, companies selling consumer staples or more discretionary consumer products are losing concern that product inflation will cost consumers less.

Communication = Blue; Consumer Discretion = Cyan; Basic Consumption = Yellow; Energy = Indigo; Finance = Purple; Health = Green; Industry = Dark Red; Computer = Orange; Material = Red; Real Estate = Pink; Utility = Lilac; S & P500 = Black.Trading view

But don’t believe that a particular sector will benefit from the war. There may be short-term winners, but the costs of economic interrelationships, the weight of sanctions, and increased uncertainty will ultimately hurt all markets. This also affects households, wages, and pensions-whatever the end result, it remains largely unpredictable.

This article has been republished from Conversation under a Creative Commons license. Please read the original article.

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